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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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Early Stage Angel Round Valuations

Comments (9)

I’m getting a lot of questions these days about early round valuations – specifically for angel rounds.  While these vary over time, and by segment, most of them tend to settle into a pretty tight range for early stage angel investments.  I’ve talked about the different approaches – either a “convertible debt” or a “light preferred”in the past.  I’ve also stated that I prefer the light preferred approach.

So – assuming you are doing a light preferred – what is a fair price?  I’ve been doing these types of investments for the past 12 years and I’ve investment in companies where the pre-money valuation has ranged from $250k to $5m and the amount raised has ranged from $50k to $2m.  While there are obviously some outliers, the normal range seems to be $1m to $2.5m pre for up to a $1m investment.  I’ve seen this reinforced recently with a number of deals done in this range.

  • Michael Schoeffler

    We’re about to go hunting for money with either early stage vcs or angels. We successfully bootstrapped into the beta stage and are getting our first revenues.

    Does this fit into the early round ($1MM-$2.5MM pre) type of company you were referring to?

    Mike

  • Charles Zedlewski

    Brad,

    The feedback I’ve received from angels is their investment is only as good as its preferences. Most angels I talked to were very keen on convertible because they wanted preferences equal to the VC’s when a funding occurred. Granted this was in 2002/2003 when there were a lot of angels on the wrong side of some preferred terms.

    Feedback I’ve heard from a few VC’s is that they dislike convertible for this very fact: they’re not so keen on others enjoying the same preferences they get, even if the others were earlier into the company.

    Is there some other issue or motivation I’m missing here?

  • http://www.angelatlanta.com Knox Massey

    We don’t use convertibles anymore–haven’t since 2003. Institutional money coming in after the angel money generally won’t honor the negotiated discount, warrants, etc. Wasn’t any point in having convertibles in that case. Besides, I’m not a big fan of putting my personal money into a deal for 6-12 months and then settling for the same terms as a VC. Like it or not, angels add plenty of value these days and they should be compensated.

    We’re back to “light preferred” as Brad mentions. We’ve done enough rounds to know what terms will be taken by the market, so we’re comfortable with that. Besides, it’s more of a seller’s market right now. If a fund wants to play games, we’ll walk to the next in line. (won’t stay that way forever, tho!)

    As for VC’s not liking convertibles because they don’t want earlier investors getting “their” terms? That’s crazy AND counterproductive. That VC would never see another deal from my group again.
    Brad is right on the $1M-$2.5 pre with approx. $500K-$1M in. However, I’ve seen a couple of pre-revenue, pre-management $3.5M-$4M deals out there–which immediately make me somewhat strangely nostalgic for 1998.

  • http://blog.softtechvc.com Jeff Clavier

    Double that $2.5M pre- and you’ll be closer to what I hear in the Valley these days, at least on the “ask” side of the transaction.

  • http://www.feld.com Brad Feld

    Jeff – I put that in the category of “bad leading indicator.” When the pre-money asks for a seed stage deal get to $10m, we know where in trouble again.

  • http://www.feld.com Brad Feld

    Mike – yes – you are squarely in the range.

    Charles – you are hearing the typical tension between angels and VCs. VCs tend to respect “sophisticated / long term angels / experienced entrepreneurs as angels” and tend to be dismissive of “friends and family as angels.” I’ve seen lots of attempts (some successful, some not) on retrades by the VCs of terms that angels thought they had – either in a convertible or in the first series of stock that they bought. It’s all up for grabs in the financing – if it’s a sellers market (e.g. the entrepreneur has the leverage – a hot deal with multiple VCs interested), the terms will stick. If it’s a buyers market (e.g. desperate for capital, only one VC interested), the terms will often be retraded.

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